This is a great multi-faceted issue to analyze and understand how inter-twined the underlying goals are, and how creative the solutions could be to fit our indian context::
1) CLASSIFICATION:
A good question raised recently is “Do those 1 Million and odd Tax Paying (or) 2Million and odd businessmen really need public-tax-funded petrol-subsidies?. My question is, how do you implement tiered-pricing charging differently for various demographic-consumers based on thier annual income?. A public funded study to identify the consumption patterns would be a good first step. It tells you what % of total petrol is being consumed by what demographics. It also would give us clues on the weightage that should be given to petrol as a commondity in CPI basket.
Certain commodities like Kerosene, Cooking-Gas has to be subsidized during these transitionary stages of the economy. But, if these subsidies get to a point where govt/budget-planning is compromising primary education or health-care allocations to balance, It is TOTAL waste of money..given the GDP contribution a good education/healthcare economy is going to make versus a broken one.
2) CONSUMPTION: From the economy’s perspective, the lower the imports.. the better the balance-of-payments/trade-surplus would be. But, with Petrol/Diesel becoming a necessity for house-hold owing to majority of the working class relying on personal transport and indirect-material-transportation-cost associated with diesel trucks…it’s a commodity that will be in CPI basket with decent weight and would have to be monitored.
POSSIBLE SOLUTION: Govt can create a model where states and/or cities investing/setting an efficient public transportation would be strongly incentivized as studies have clearly shown that countries carrying good public transportation had lower per capita fuel consumption. Once you provide this, the weight of fuel in CPI basket can come down and non-essential-splurge of fuel could be taxed through congestion(time/permiter) taxes you see in countries like singapore and UK.In essence, provide an alternative to typical-households before you tax the consumption (or) eliminate subsidies on that commodity.
3) CPI/WPI/PPI: Good amount of totally valid discussion is in different blogs on the accuracy, applicability, transparency, usage of these different inflation metrics in indian context. CPI, despite the fact that this is still not reflective of typical household consumables and not transparent..is a resonable metric to look at, as the criteria is better than WPI.
QUESTION: Now, should govt. be manipulating the market (Oil bonds, etc.) each time a commodity in CPI basket shows price distortion (or) handle the CPI at the macro-economic level by leaving the control-knobs to RBI??
MY ANSWER:A) If distortion is artificial (price gouging, etc.) >> step in and correct the situation. [Examples: Wheat, Cement]B) If distortion is global and supply-driven and is inevitable >> make policy changes to cut down the demand and incentivize alternative commodities and/or also delegate it to macro-economic-policy-drivers like RBI.[Examples: Petrol, Cement]
The federal govt. can make these kind of guidelines as part of National-Commmodity-policy, just like security policy and evolve this under independent body with out any politicking and mud-slinging by opposition during these market distortions forcing the ruling-party to haphazardly invent short-term price-smoothing tricks (Oil Bonds!) that create more damage in the long term.
Any takers? Montek? Manmohan? Chidambaram? RBI Team?
PS: My comments to different blogs in IndianEconomy.org:
INDIA: Wheat Imports and Derivatives:
INDIA: Oil Bonds:
INDIA: Productivity Miracle:
INDIA: Protect the chain:
INDIA: Helping indian farmers:
